Bermuda reinsurer Validus Holdings Ltd has agreed to buy Flagstone Re in a deal valued at $623.2 million.The two companies expect the deal to close in the fourth quarter of this year and the combined company will maintain Validus’s name, headquarters and executive management.Flagstone, like Validus, started life in Bermuda in 2005, with the aim of capitalising on high reinsurance rates in the wake of Hurricane Katrina. Now, its holding company is in Luxembourg, while its operational headquarters is in Switzerland, but Flagstone still has a substantial underwriting platform in Bermuda.Yesterday, Validus chairman and CEO Ed Noonan told The Royal Gazette: “This a good day for Validus and a great day for Bermuda. We feel good about bringing Flagstone back to Bermuda.”It was not clear yesterday what the future will hold Flagstone’s Bermuda-based staff, thought to number around 40 people and led by CEO David Brown.But there is significant overlap, particularly between the property-catastrophe reinsurance business that makes up more than half of Flagstone’s book and nearly a third of Validus’s business.Mr Noonan said it was too early to talk about the impact of the deal on Flagstone’s staff, but he expressed confidence that Validus would hold onto most of the business now written by Flagstone.Flagstone has nearly 200 staff around the world. A note from a Merrill Lynch analyst suggests that job cuts are probable.“We do not foresee cultural issues emerging,” the note stated. “Given the scalability of the business, we would expect Validus to reduce Flagstone’s headcount materially, reducing the chances for cultural issues to emerge. The company took a similar approach in its acquisition of IPC holdings in 2009.”Validus cut 16 of IPC’s 30 staff within months of acquiring the fellow Bermuda reinsurer in 2009.Standard & Poor’s Rating Services last night affirmed Validus’s financial strength rating at A. S&P said it expected “limited integration of Flagstone’s underwriting operations”.The transaction gives Flagstone shareholders a 19.4 percent premium over Monday’s closing share price of $7.06, and is valued at $8.43 of value per Flagstone share.Under the terms of the agreement, Flagstone shareholders will receive 0.1935 Validus voting common shares and $2 in cash for each Flagstone share. In total, this means Validus would make a cash payout of nearly $148 million to Flagstone shareholders and issue $475 million in Validus common shares.Flagstone shareholders would own about 11.9 percent of the combined company. Validus also will assume $250.2 million of Flagstone hybrid junior subordinated deferrable interest debentures.It was revealed in a Validus investor presentation that Flagstone had first approached Validus with a view to merging in March this year, but Validus opted not to pursue a deal.After undergoing significant streamlining of its operations this year, Flagstone made another approach in late July, which culminated in yesterday’s announcement.Validus has aggressively pursued growth by acquisition during its seven-year existence. The company acquired IPC Holdings Ltd in 2009, in a deal worth nearly $1.7 billion, after first derailing that company’s agreement to merge with Max Capital. Last year Validus was among the bidders for US reinsurer Transatlantic Holdings, but eventually lost out to Alleghany Corp.Asked if he anticipated any rival bids, Mr Noonan said: “Who knows? We’ve put together a great deal together for Flagstone shareholders. And, as you know, we tend not to shy away from a fight.“If there is someone out there who’d like to give it a shot, then we’re quite comfortable defending what is in our shareholders’ best interests and doing it quite aggressively.”Validus indicated yesterday that Lightyear Capital and Trilantic Capital Partners, which together own about 22.5 percent of Flagstone’s shares, have agreed to vote in favour of the transaction.“The price seems very reasonable, possibly enough to attract other bids,” said Meyer Shields, an analyst at Stifel Nicolaus & Co, in a note to investors. “Validus has proven to be a successful, albeit somewhat aggressive, acquirer that should benefit from increasing scale and diversification.”Flagstone has undergone a major restructuring this year, after suffering a net loss of $326 million last year on heavy catastrophe losses.The company sold off its Lloyd’s unit and its interest in Cayman-based insurer Island Heritage and slimmed down its business.In a statement, Flagstone CEO David Brown said the transaction offered a significant premium and immediate value for the firm’s shareholders, and provides a more stable capital base with which to underwrite over the long-term.“Over the past ten months, Flagstone has taken steps to strategically shift our business model, becoming a more focused and efficient underwriter and we believe this transaction reflects our progress,” Mr Brown said.“Further, we believe that Flagstone and Validus share a strong technical, analytical approach and a commitment to providing exemplary service for our clients.“We look forward to working with Validus to complete this combination and create shareholder value. The transaction, which our board of directors has unanimously concluded, is in the best interest of Flagstone, concludes a lengthy and extensive process in which the board carefully considered a broad range of strategic alternatives.”Mr Noonan paid tribute to Flagstone’s restructuring efforts. “David Brown and his team at Flagstone have done an excellent job for their shareholders in refocusing around property-catastrophe business,” he said. “Being a lower-rated company and one of the smaller companies, they were in a difficult space and there’s only so far you can go.”In striking the agreement with Validus, Flagstone shareholders were getting “a very attractive deal”, Mr Noonan said.The move is expected to add around $292 million of annual property catastrophe gross premiums to Validus’s book of business. According to the company’s investor presentation released with news of the proposed Flagstone deal yesterday, this would make Validus the Island’s largest underwriter of property catastrophe business.The combined company would have shareholders’ equity of $4 billion, up about $0.5 billion from Validus’s current size.“We think scale matters and we’ve proven that,” Mr Noonan said. Greater size gave the company not only greater capacity to write more business, but also to “see every deal in the market and the ability to pick and choose”, he added.The combined company would modestly increase the proportion of property catastrophe business in the Validus book from 32 percent to 37 percent, a level the company was comfortable with, Mr Noonan added.